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Innovation programsCutting through the blockchain hype

UBS started a journey to explore, harness and share the potential of distributed ledger technologies and its innovative business models.
by Claudio Lisco05 Dec 2016

Working out of the UBS Innovation Lab in London Dockland's Level39, the UBS Crypto Pathfinder Program’s team comprises technology, business, and finance experts. The team collaborates with UBS colleagues from across its business divisions around the world and with many of the tech startups based at Level 39. They also work with external partners including other banks, government, universities and businesses. The goal of the program is to develop, enable and promote open standards for blockchain technology, and shape better financial services. It is literally a pathfinder mission: the Crypto 2.0 team is conducting genuine research, developing experiments and creating a vision.

Blockchain and related technologies have the potential to trigger far-reaching changes in banking processes. To stay ahead of the curve, our Crypto 2.0 Pathfinder Program is conducting business analysis and experiments to apply the technology to real use cases that span investment banking, wealth management, corporate banking and retail. At the Innovation Lab we have explored more than 20 use cases and are currently "incubating" and "accelerating" the most promising.

The Smart Bond experiment

One of our first experiments with smart contracts resulted in the development of a "smart bond". We built an application on the Ethereum platform that can recreate a bond’s issuance, interest calculation, coupon payments and maturation processes. In this model there is no need of pre- and post-trade intermediaries. as the software on blockchain was specifically configured to automatically handle the flow of information and money between the issuer and the buyer. The experiment also required the creation of a virtual token, which we dubbed "BondCoin", enabling value transfer between the parties. The token, was not intended as new virtual currency, but rather as linked to real-world currencies, connected to a central bank account. This experiment validated our initial assumptions on smart contracts and virtual currencies, and confirmed the applicability of these logics across our use cases. It also confirmed the potential benefits for our clients, the regulators and our organization: clearing and settlement on blockchain could be faster, more efficient and transparent while reducing settlement risk and operational cost.

Blockchain and the real world

Leveraging the findings and the experience gained through the BondCoin, we started an additional experiment with a "Utility Settlement Coin". The objective of the experiment was to create a virtual coin linked to real fiat currency on blockchain to settle transactions on financial platforms based on blockchain technology. In a future scenario, where UBS might have its own blockchain-based platform to issue bonds, and another bank might have a blockchain-based stock trading platform, the Utility Settlement Coin could be used for settlement on both platforms. This could help bridge the gap between asset classes and between the blockchain and the real world, potentially bringing a number of benefits similar to those observed with the smart bond experiment. The initial experiment, incubated through collaboration between UBS and blockchain startup Clearmatics, validated the potential benefits of the Utility Settlement Coin for capital efficiency, settlement and systemic risk reduction in global financial markets. The successful conclusion of this first phase paved the way for the introduction of additional partners: in August 2016, BNY Mellon, Deutsche Bank, ICAP and Santander have joined UBS and Clearmatics to accelerate the development of the project and run inter-bank tests.

Our approach to blockchain also confirms our preference for collaborative development and open innovation. In mid-September 2015, along with eight of the world's leading banks, we announced the formation of a partnership to design and deliver advanced distributed ledger technologies to global financial markets. Led by financial innovation company R3 CEV, the partnership now counts more than 70 global financial institutions that are collaborating on research, experimentation, design and engineering to help advance state-of-the-art enterprise-scale shared ledger solutions to meet banking requirements for security, reliability, performance, scalability, and audit.

At the forefront of fintech

By creating a dedicated Innovation Lab at Level39 to explore blockchain and other fintechs, UBS is fully immersed in London's innovation ecosystem. Level39 is Europe’s largest technology accelerator for finance, cyber-security, retail and future cities technology, hosting over 190 companies active in these fields. UBS has extensive industry expertise to offer the community and can partner with fintech companies to analyze and develop new potential applications for financial services. These experiments and partnerships will enable us to stay at the forefront of fintech in a fast and ever-changing financial landscape. As a leading financial organization, it is our duty to understand technological advances and their implications and to share the knowledge and benefits with clients, the financial industry and society.

UBS blockchain white paper

Earlier this year we released our white paper "Building the trust engine: How the blockchain could transform finance and the world." in an attempt to share our vision – in a non-technical and hopefully vivid way – with our clients and the general public. Read the white paper to learn more about blockchain.